When the Bubbles Pop

In November, David Stockman advised President-elect Trump to pop the bubbles before he entered office. Looking back on his team-work with President Reagan, Stockman recounted how the Reagan economy crashed after his first year and then the Reagan policies were helpful in the rebuilding. Stockman’s big idea was for Trump to ask for Chairperson Yellen’s resignation on his desk on January 20th. Candidate Trump said the market was a bubble and blamed the Fed’s cheap money. [Click here to hear the complete ContraKrugman David Stockman interview.]

President Trump didn’t take Stockman’s advice. Trump did the opposite. He embraced the inflated market and took credit for the growth.

Before we speculate on which pin pops the bubbles, let’s compare Trump to Reagan.

In our first chart, Ronald Reagan came along at just the right time. The stock market had been going sideways for ten years. How much of the next 20 years was the result of Reagan? Less than you may think! The change in the market’s direction had more to do with business cycles, demographics, technological revolutions and debt-driven consumption and investing. Presidents don’t have much to do with economic growth. [Click here and here.] Yes, President Reagan helped, but he wasn’t responsible for the economic growth. The economy is bigger than a president’s policies.

Fast-forward to 2017. President Trump comes into office after eight years of a Fed-induced bull market; one without normal cycle corrections. Will our president trump business cycles and economic laws? I wouldn’t bet on it. (I believe he knows he can’t.)

This next chart appeared in December. It shows today’s market is nearly as expensive as the 1929 bubble. In January, hedge fund manager David Kranzler said Robert Shiller’s chart was wrong: this is the most overvalued stock market in U.S. history! What they are debating is not the nominal price of the S&P 500, but rather the price of stocks compared to company earnings. Regardless of who’s right on that topic, note that Reagan came into office with the third lowest valuations! Once again, Reagan’s timing was nearly perfect and Trump’s timing couldn’t be worse.

Well, it can be worse. The U.S. bond market is significantly bigger than the U.S. stock market. It is also more important. With our third chart, President Reagan came into office a year after interest rates peaked. For his eight years, interest on the national debt became cheaper and bondholders saw increasing profits, as interest rates declined.

Never before in U.S. history have we had eight years of a Zero Interest Rate Policy (ZIRP). It has destroyed our capital markets.[1] Every market is now manipulated.[2] This manipulation continues to this day.[3] Now the keys to the economy have been handed to President Trump. “Good luck!” the outgoing President must have said with a smirk.

These are half of the charts included in this comparison [Trump vs. Reagan]. For this article, let’s just say President Trump is on the edge of a very bad cycle change. The bubbles are, I believe: global stock markets, global bond markets, global real estate markets and bubbles in currencies. We’ve been in the eye of the storm. The first wave of this storm hit in 2008-2009. We are about to see the second wave come ashore.

What could pop these bubbles? It could be Congress. This Friday (April 28th) is a pivotal point with government spending; a budget needs to be approved. In the next 60 days, a battle over raising the debt ceiling could be financially catastrophic. Could the current mutiny in our government—the deep state, the Democratic Party and the progressive Republican establishment—do something which would provide the pin? Could the popping be blamed on President Trump? Will the next Federal Reserve interest rate hike be the event?

I don’t think any of the above pins will be responsible for the next financial event. There are too many opportunities to blame the next financial crisis on a foreign government or foreign event. Some of the known options: Russia (anything they do), China, Syria, the May French election, Italy, Spain, Greece, and Deutsche Bank. My current guess is North Korea.

If missiles fly into North Korea, I believe the U.S. stock markets will close. For example, if a war began on a Friday night, the U.S. stock markets would be closed on Monday morning. The trading of precious metals (COMEX, London Bullion Market, and the Shanghai Gold Exchange) would also be closed. Many of the bullion dealers would not sell their inventory—why would you sell if you knew you could get 2x or 3x more money if you simply waited a week?

In other words, if I’m right and there is a war, not only do the bubbles pop, but we’re frozen in our investment positions. Investors will understand when the markets do reopen, the general stock market will be significantly lower and precious metals will be at new highs.

If North Korea can successfully launch their missiles and get them through defensive systems, then I think we’ll see U.S. banks close—they will call it a “bank holiday.” Under this scenario, not only would investment positions be frozen, but so would cash. ATM’s would be programmed to distribute only a few hundred dollars a day.

If you think my forecast can’t possibly happen, then take this article as a pop quiz.

You’ve flunked. You are reading the wrong news. My stock market forecast is what happened the week of 9-11. My banking forecast is what has happened in Greece and Cyprus. It is consistent with what the Federal Reserve, FDIC, Treasury Department, G7 and the last White House administration have said they would do.

If North Korea is the event, and it can be done without destroying South Korea and Japan, then President Trump will be able to blame the consequences on his predecessor. President Trump has already established the basis for this blame: “I inherited a mess…It’s a mess…at home and abroad. A mess. Jobs are pouring out of the country…Low pay, low wages, mass instability overseas no matter where you look—the Middle East, a disaster, North Korea. We’ll take care of it, folks. I just want to let you know I inherited a mess.” [4]

If the pin is North Korea, then President Trump will be able to say, “My first 100 days were going great. The stock market was at an all-time high. Jobs were coming back. I proposed the biggest tax cut in history. It was truly a beautiful thing. Then, I had to clean up Obama’s mess.”

Following that announcement would be Chairperson Yellen’s assurance, “Don’t worry, we will recreate the recovery we did before. QE4 will be huge.”

If Trump doesn’t use the current crises to pop the bubbles, he risks being blamed for them, later, when they do pop. I’m suggesting we don’t underestimate Trump’s ability to spot bubbles and pop them.

“Dollar” Bill is a real guy, with real knowledge on our nation’s financial calamity, and real solutions for what must be done to dig ourselves out of the hole we are in. Due to his career, Bill must remain “disguised” to protect his position. “Bill” loves America, sees the impending cliff we are all headed towards, and hopes that by sharing his inside knowledge of the failed monetary policy in our nation, that a fiscal “nuclear” event can be minimized.